How To Pay Back Unused Student Loan Funds | Student Loan Ranger

Once a student accepts a student loan package, funds are generally applied directly to your student account balance and may be applied to tuition and fees or other costs, such as room and board. Loan packages are typically split between the fall and spring semesters. Any excess is paid directly to the student by check or direct deposit to the student’s bank account to be used for qualified educational expenses.

The Student Loan Ranger often gets questions from readers, and we occasionally take the opportunity to share some of the common issues borrowers face. This is an example of a question we recently received about uncashed student loan refund checks and how to handle disbursement refunds. The question has been edited for clarity and to protect the privacy of the reader.

Q: I was cleaning out in the garage and found two $7,000 worth of student loan refund checks dated 2009 and 2010, respectively, in a box full of old school-related paperwork. However, I have contacted my previous school and they claim that the money was not returned to the lender and that my “account” with the school is credited with $7,000. Now they’re sending me that money next week.

My question is, are schools required to return uncashed checks to the lender after a certain amount of time has passed? I’ve been paying interest on money I never had in the first place. Is there something I should ask or do? Or should I just take this money and immediately pay off most of my loans?

You did the right thing by contacting your lender to find out the status of these funds. Unfortunately, you can’t get around the fact that you’ve been paying interest even though you never cashed the checks.

According to Federal Student Aid, an office of the US Department of Education, once student loans are disbursed, the student has 120 days to pay the money back to the lender without paying interest or fees. There is no provision that requires the lender to return an unused amount of a loan to the lender. After 120 days, a student can still pay back any leftover funds, but she will likely end up paying some interest if it has accrued.

It is important for borrowers to know what qualified education expenses can be covered by student loan disbursements. Student loan disbursement refunds can be used to cover academic or living expenses while you are in school, such as housing, food, and transportation. If the student has other ways to pay for these expenses, such as a part-time job or parental support, it would be best to return the funds. It is important for students to understand the implications of these funds on their future financial success after graduation.

Spending on unnecessary expenses unrelated to school, such as extravagant spring break trips or a new car is not recommended, as it is ultimately money that you will have to pay back. By signing a student loan promissory note, you agree to spend the funds only for school-related expenses.

Student loan disbursements should not be viewed as free money to spend on whatever you choose. A reasonable amount can be set aside for clothing, transportation, and other necessary expenses, but knowing that it will have to be paid back with interest upon graduation should deter borrowers from unnecessary spending. However, borrowers won’t have to provide a receipt or any proof of their spending on qualified expenses, so it’s up to you to spend wisely.

In this case, since the school is sending you the $7,000 refund check, the best thing to do with it is to send it to your loan servicer and pay off your student loan debt. You can’t do anything to reduce the interest you’ve already paid, but you can reduce the amount you’ll have to pay in the future.

Readers who are current student loan borrowers should keep in mind that paying back unused funds can save you hundreds of dollars in interest. If possible, it’s best to notify your school within 30 days of receiving the disbursement that you want to pay it back or cancel the loan.

If notified in time, the school can avoid sending the refund and having to cancel the check or deposit. It saves the borrower and lender additional steps. But, borrowers have 120 days from disbursement to repay funds without penalty. Missing the recommended deadlines makes for a more cumbersome process, as you’ll have to work with your school’s financial aid office to get the funds back.

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You must submit your request to return the funds in writing so that you can establish a paper record and prove your desire to return the unused money.

If you’re out of the time window and just want to pay back unused funds at the end of the semester, contact your lender for information on how to make a student loan payment. The lender will be able to tell you where to send it and how to get it into the right hands.

Your future self will thank you for being financially responsible and managing your student loans wisely.

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